FINRA CEO: BrokerCheck Revamp Won’t Include Test Scores

Challenges and Next Steps

Ketchum also called on brokers and advisors to ensure they are identifying conflicts of interest and placing clients’ interests first. He outlined three ways in which firms and regulators can together do just that. 

First, Ketchum called on firms to do a better job of assessing—and disclosing—conflicts.

“We understand that conflicts exist in the financial services industry. We need to take a step back, acknowledge that there are risks and look at how we handle those conflicts,” he said. Ketchum pointed to a directive issued by Stephen Cutler, who was director of the SEC’s Division of Enforcement nine years ago, which asked firms “to undertake a top-to-bottom review of their business operations with the goal of addressing conflicts of interest of every kind.” Ketchum said he would like to see “such a concept review become a standard part of operating procedure. You should be assessing whether your business practices place your firm’s—or your employees’—interests ahead of your customers.” He promised that, “particularly with respect to the large integrated firms, we will look to have a focused conversation with you about the conflicts you have identified and the steps you have taken to eliminate, mitigate or disclose each of them.”

Second, he called on firms to ensure that the products they sell are “appropriate” for each investor. Ketchum reiterated the concerns FINRA has had about firms’ sales of complex products, noting the regulatory notice FINRA published in January, as well as the enforcement actions the regulator brought involving complex products where firms didn’t adequately supervise the sale of the products, the recommended products were unsuitable for the investors, or the sales materials were misleading.

“Before recommending a complex product to a retail customer, your financial advisors should be discussing the features of the product, how it is expected to perform under different market conditions, and the product’s risks, potential benefits and costs,” Ketchum said. “This means describing the circumstances under which the customer could lose money, not just those under which the customer would earn money. It also means explaining carefully the direct and imputed costs your client will incur and, where applicable, the fact that your firm or an affiliate is on the other side of the transaction.”